Candidates Vow to Cut Home Sales Tax

WASHINGTON — Whatever your political preference, if you're a homeowner--especially in a higher-cost market--you're virtually certain to emerge a winner on taxes from the 1996 presidential contest.

That's because both Bob Dole and President Clinton have proposed generous new tax benefits in their campaign planks for this fall. Since the plans share numerous similarities, the odds are strong that some blended version of them will be included in congressional tax legislation next year no matter who wins.

But the proposals do have some important differences. And certain features are easy to misunderstand because they involve complex tax law issues. To help you figure how either plan might affect you at the bottom line, here's a point-by-point comparative analysis.

Both the Dole and Clinton programs would simplify one of the most vexing and costly issues for homeowners: capital gains taxation on a home sale.

For the overwhelming majority of home sellers across the country, Clinton and Dole would provide an easy-to-grasp, potentially lucrative answer: If you rack up a profit on the sale of your house, don't worry about it. Your home sale profits henceforth will be free of federal taxation, unless they're exceptionally large.

You read that right: Both the Democratic and Republican candidates are promising the nation's 66 million homeowners zero taxation on most home sale profits.

Under the Clinton plan, capital gains taxation of home sale profits wouldn't even start for a married couple filing their taxes jointly until the gain on a given transaction exceeded $500,000. Singles would have a $250,000 tax threshold.

Under the Dole plan, the threshold would be $250,000 for a married couple filing jointly--unless they had lived in their house over 10 years. At that point, they could exclude from taxation another $25,000 a year, up to a total $500,000 tax-free for couples who had owned their principal residence for 20 years. Singles would have a $125,000 initial threshold and a $12,500-a-year add-on exclusion, for a total $250,000 per transaction, if they had lived in their home more than 10 years.

Besides the huge tax windfall, both proposals would effectively negate the traditional rollover rules. Under current law, you have to buy a replacement home of higher or equal cost within two years of your sale. This would be an extremely significant change for baby boomers and anyone else who has built up a sizable equity and wants to downsize.

Both plans would also eliminate the current $125,000 one-time tax-free exclusion for homeowners 55 and older. Even if you and your spouse were just thirtysomethings and experienced a $200,000 gain on the sale of your home, you could pocket it tax-free under either plan.

To qualify for the substantial new benefits under the Dole plan, you would have to have used your home as your principal residence for at least three of the preceding five years. Under the Clinton plan, you'd need to live there for just two years.

The Dole plan is part of a larger, more sweeping reduction in capital gains taxes overall. Clinton's program is one of his "targeted" initiatives aimed at select segments of the voting public. Dole's campaign hasn't broken out the revenue-loss cost of his home-sale plank. Clinton aides estimate the cost of his plan at $1.4 billion in lost federal revenues through 2002.

Who makes out best under the competing homeownership tax plans? Clearly the biggest potential winners under either plan are homeowners with substantial gains already built into their houses.

If you bought your home in the mid-1960s for $45,000 and you could sell it for $245,000 today, you've got a $200,000 gain that goes into your pocket tax-free under either proposal.

If you're over 55 with that gain, under current law you could exclude the first $125,000 of it from the tax bite. But the remaining $75,000 would get taxed at the 28% capital gains rate--a $21,000 chunk off your bottom line.

The biggest cheers for the Clinton plan may well come from the highest rollers. With a $500,000 tax-free limit per transaction--repeat per transaction, not a lifetime maximum--you could buy a mansion for $1.5 million and resell it for $1.95 million tax-free. Then you could turn around and buy a $2 million home and sell it two years later for $2.45 million. You could repeat this process indefinitely, each time pocketing $450,000 tax-free, for as long as you could keep up the hot streak. You'd get hit with a capital gains tax only if your gain went over $500,000 on any sale. Even then, the tax would be on only the amount in excess of $500,000.

Under the Dole plan, by contrast, that ceiling would be $250,000, provided you lived in the house for three years of the preceding five.

Either way, though, your tax-free proceeds would dwarf the current $125,000 maximum for sellers 55 and older.